India has been actively involved in businesses, trade, and forming association since as early as Indus Valley Civilization. And guess what, the ancient Indian merchants formed guilds (Shrenis) to regulate businesses and trade. These guilds not only focused on quality control, productivity parameters, and business regulation but also on the pooling of resources and fostering managerial skills. Today, Indian MSMEs have attained kind of a similar role to ancient merchants. However, these MSMEs function without an official and robust regulatory system. The modern Indian enterprises need Self Regulatory Organizations to build capacity. The need of SROs for Indian MSMEs has become visible more than ever in the face of the Covid-19 pandemic that sent small and medium enterprises down the hole.
What is the Role of MSMEs in the Indian Economy?
The MSMEs in India represent a distinctive sector that fosters a sustainable GDP growth by employment creation at micro levels and export promotion. India has around 63 million MSMEs contributing around 29% to India’s GDP. These 63 million MSMEs provide employment to around 120 million people, i.e., 40% of India’s non-farm workforce. In addition, the MSME sector contributes to approx 25% of services output and a huge 33% manufacturing output.
How many MSMEs are there in India in 2020?
India has around 63 million MSMEs as of now. Out of these 63 million MSMEs, around 99.4% are micro MSMEs. The Remaining 0.52% comes under the small segment leaving a mere 0.01% in the medium sector. Moreover, around 51%, i.e., around 3.24 crore in India operate in rural and remote areas. This 99.4% micro segment comprises single-individual operators such as grocers, commercial vehicle-owners, craftsmen, etc. Most of these micro-businesses are not registered, thus forming a part of an informal economy. Now, being informal brings twin challenges.
- First, as such SMEs rarely get access to formal financial funding channels, they resort to moneylenders ultimately lending in a debt trap.
- Second, the micro-enterprises are miles behind in assessing market trends and industry performance. This inability due to lack of awareness acts as a major sticking point that hinders MSME sector growth.
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But these micro-enterprises that account for the bulk of India’s informal economy act as a crucial job cushion for many in the workforce. The negative effects of the COVID-19 pandemic on enterprises, especially informal ones, have been acute. Self-regulatory organizations can be a great way to unravel the potential of micro and small enterprises in India
What are Self Regulatory Organizations?
In simple terms, Self Regulatory Organizations (SROs) are the non-governmental organizations constituted for a particular target group. Their main functions include framing and enforcing rules, procedures, and standards associated with the conduct of entities in their respective segments. If used strategically, SROs have the potential to drive immense growth and improve reliability for the MSME sector.
How can SROs help Indian MSMEs in Scaling up and Innovation?
Currently, the MSME sector growth is not as expected. Here are the key routes through which self regulatory bodies can help build capacity and improve the reliability of MSMEs
- Active and regular collaborations are identifier marks of self-regulatory bodies that can help in active engagement from the stakeholders. SROs can help in bringing the MSME clusters, government ministries, sectoral regulators, industry experts, and the scientific community at one stage. Not only this will bring effective initiatives for the sector but also make innovation a driving force for growth.
- SROs can become the driving force for the MSME sector to come together strongly and frame better quality parameters. Not only this, they can give a big push to enhance industry performance and productivity parameters.
- By helping the MSMEs to build capacity, the self-regulatory organization in India can ensure the introduction of targeted value-added product design of global standards.
- SROs can play a key role in educating the micro and small enterprises about formal funding channels, finance and investing government schemes for MSMEs, and the need for digitization.
- SROs can essentially work as the touchpoints for providing peer-enabled learning and quality training. Further, self regulatory organization in India can enable rapid-paced skilling as per market needs, and hand-holding in distressing times.
- By improving the quality and manufacturing capacity of the Indian MSME sector, SROs can foster export competitiveness. Not only this will improve profit margins, but also help in import substitution and bridging the current high trade deficit for India.
What is China’s Cluster Model for MSMEs?
MSMEs in China contribute a massive 60% to its GDP and employ 80% of the country’s workforce. The strategic “SME Clustering Model” of China is the giant reason behind the immense success of their MSMEs. The model works on the “one village, one product” and “one town, one industry” concept. The idea is to focus on manufacturing and marketing in one locality rather than diversifying the resources among different niches. Along with specialization, China has been providing subsequent impetus to its MSMEs in the form of skill development, training, and financing to help them scale and get access to international markets.
Considering India’s unique MSME landscape, India can definitely extract the key success points suited to our composite groups of the village and micro industries; like beekeeping, ivory-carving, lock-making, iron-safes, textile works, food processing, forest industries, toy-making, perfumery and many more. While India has had such association settings for hundreds of years, such organizations do not have an official status yet. Most of them exist in an unofficial setting bringing together the remote and fragmented enterprises into a common thematic fold.
Acknowledging the role of SROs and bringing them under an official regime will not only enable them to raise large sums of funding but also forms a self-regulation capacity. The government can also consider the idea of designating selected MSMEs as Self Regulatory Organizations (SROs).
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Can SROs be the Game Changers for the Indian MSME Sector?
By playing a multi-faceted role in the growth of small and medium enterprises, SROs can pioneer the development-oriented policies and their implementation at the micro-level in true spirit. Moreover, as SROs function at base levels, they can pitch innovative ideas and convey the fundamental issues of the MSME sector to the government better than anyone else. They can also be key players in efficiency tracking of the government schemes and assessing the penetration of programmes to the micro strata. SROs go beyond the upper creamy layer of big MSMEs to reach the micro, remote, and rural enterprises in dire need of assistance. With sufficient thought given to the SROs, they have the potential to enforce a stand-alone industry and frame professional regulations within that industry or profession. The MSME SROs will also boost the confidence of the lending institutions to provide more finance to MSMEs without collateral. If successful, this can solve the major issue of lack of funds that Indian MSMEs face almost every day. Besides, by educating the micro and small enterprises on how to incorporate branding, competencies, automation, digital interventions, e-marketplaces such as Amazon and Flipkart, government schemes, and human capital development; the self-regulatory bodies can truly be the game-changer for the Indian MSME sector.
Written by,
Prasad P. Patkar